STRATEGY
Chapter 1
Core Concepts and Analytical Approaches
PowerPoint Slides
Chapter 1 Learning Objectives
2nd Edition
1. Understand the concept of “strategy,” how to identify a company’s
strategy, and the tight connection between a company’s strategy
and its quest for sustainable competitive advantage.
2. Learn why a company’s strategy evolves over time and why a
company’s strategy is partly proactive and partly reactive.
3. Understand why a company’s strategy needs to pass ethical
scrutiny.
4. Understand the concept of a “business model,” how a company’s
business model connects to its strategy, and why a company’s
business model is important.
5. Learn the three tests that distinguish a winning strategy from a sososo or flawed strategy and why good strategy and good strategy
execution are the most trustworthy signs of good management.
management.
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The Three Big Strategic Questions
Every Company Faces
Chapter 1 Roadmap
What Do We Mean by “Strategy?”
What’s the company’s present situation?
Strategy and the Quest for Competitive Advantage
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Identifying a Company’s Strategy
A Company’s Strategy Is Partly Proactive and Partly Reactive
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Strategy and Ethics: Passing the Test of Moral Scrutiny
The Relationship Between a Company’s Strategy and Its
Business Model
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Why Crafting and Executing Strategy Are Important Tasks
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A company’s plan for heading the company in the intended direction,
staking out a market position, attracting customers, and achieving the
targeted financial and market performance is its strategy
strategy..
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The Hows That Define a Firm’s Strategy
Core Concept: Strategy
A company’s strategy consists of the
competitive moves and business approaches
that managers employ to attract and please
customers, compete successfully,
successfully, capitalize
on opportunities to grow the business,
respond to changing market conditions,
conduct operations, and achieve the targeted
financial and market performance.
performance.
A strategy represents managerial commitment to
undertake one set of actions rather than another.
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What emerging buyer needs to try to satisfy? Which growth opportunities
to emphasize? Which existing markets to deemphasize or even
abandon? Where should the company be headed? How should the
company’s success be measured?
What’s our plan for running the company and producing good
results?
What Makes a Strategy a Winner?
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Industry conditions? Competitive pressures? The company’s current
market standing? Competitive strengths? Competitive weaknesses?
What should the company’s future direction be and what
performance targets should we set?
set?
Why a Company’s Strategy Evolves Over Time
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A company’s strategy requires making
numerous choices or decisions about How:
How:
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How to attract and please customers.
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How to compete against rivals.
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How to position the company in the marketplace and
capitalize on attractive growth opportunities.
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How to best respond to changing economic and
market conditions.
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How to manage the functional pieces of the business.
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How to achieve the company’s performance targets.
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STRATEGY
Chapter 1
Core Concepts and Analytical Approaches
PowerPoint Slides
Why Bother with Crafting a Strategy ?
Choosing the “Hows” of Strategy
Company managers need a clear, specific, and
deliberate action plan to:
Strategic choices about “how” are based on
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►
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Trial-and
Trialand--error organizational learning about what has worked
and what has not worked
Management’s appetite for taking risks
Managerial analysis and strategic thinking about how best to
proceed, given market conditions and a company’s
circumstances
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Avoid conflicting or inconsistent or uncoordinated strategic
actions and decisions
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Strengthen the company’s competitive position.
Win a competitive edge over rivals.
Improve the company’s financial performance.
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In choosing a strategy, management is in effect saying,
A creative, distinctive strategy:
“Among all the many different ways of competing we could
have chosen, we have decided to employ this combination of
competitive and operating approaches to move the company
in the intended direction, strengthen its market position and
competitiveness, and boost performance.”
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Sets a company apart from rivals
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Helps draw an attractive numbers of buyers to purchase a
company’s product/service despite the efforts of competitors
to erode this appeal
Can be a reliable ticket to above average profitability
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Strategy and the Quest for
Competitive Advantage
The Essence of Good StrategyStrategy-Making
Good strategystrategy-making is about making
choices to compete differently from rivals.
This means:
A firm achieves competitive advantage
when an attractive number of buyers are
drawn to purchase its products or services
rather than those of competitors.
► Appealing
to buyers in a way that delivers added
value to buyers in ways that rivals don’t do or
can’t do
► Carving out the company’s own market position
► Developing a distinctive “aha” element to
attract customers
But a lasting or durable or sustainable
competitive advantage is even better!
Copying the competitive moves of other
successful companies rarely works!
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Strategic Approaches That Set a Company
Apart and Lead to Competitive Advantage
Core Concept
A company achieves sustainable
competitive advantage when an attractive
number of buyers are drawn to purchase its
products or services rather than those of
competitors and when the basis for such
purchases is durable,
durable, despite the efforts of
competitors to overcome or otherwise erode
the appeal of its offering
offering..
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Four Dependable
Routes to Competitive Advantage
LowLow-cost
provider
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Differentiating
features
Focus on
market niche
Specialized
Expertise
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STRATEGY
Chapter 1
Core Concepts and Analytical Approaches
PowerPoint Slides
Why Winning a Sustainable
Competitive Advantage Matters
Strategic Approaches to Building
Sustainable Competitive Advantage
Four dependable approaches to achieving a
competitive edge over rivals:
1. Striving to become the industry’s low
low--cost provider (being
more cost efficient than rivals).
2. Outcompeting rivals on important differentiating features
(having a more appealing product/service).
3. Doing a better job than rivals of serving the special needs
and tastes of buyers comprising a certain market niche.
4. Developing expertise and resource strengths that rivals
cannot easily imitate or trump with capabilities of their own.
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Figure 1.1
A company is almost certain to earn significantly higher
profits when it enjoys a competitive advantage as opposed
to when it competes with no advantage or is hamstrung by
competitive disadvantage.
disadvantage.
Without a strategy that leads to competitive advantage, a
company risks being outcompeted by stronger rivals
and/or locked into mediocre financial performance.
Consequently, the quest for sustainable competitive
advantage should always rank center stage in a
crafting a strategy!
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Why a Firm’s Strategy
Evolves over Time
Identifying a Company’s Strategy—What to Look For
There are times when managers find it advisable
or necessary to modify strategy in response to:
► Changing
market conditions
technology
► Fresh moves of competitors
► Shifting buyer needs and preferences
► Emerging market opportunities
► New ideas for improving the strategy
► Mounting evidence that the current strategy
is not working well
► Advancing
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Core Concept
A Company’s Strategy Is Partly
Proactive and Partly Reactive
Changing circumstances and ongoing
management efforts to improve the strategy
cause a company’s strategy to evolve over
time
time—
—a condition that makes the task of
crafting a strategy a work in progress,
progress, not a
one
one--time event.
The typical company’s strategy is a blend of:
Copyright © 2012 GloGlo-Bus Software, Inc.
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► Proactive
and deliberate actions to compete
more successfully,
successfully, secure a competitive edge,
and improve the company’s financial
performance. This part of strategy consists of
new initiatives plus ongoing strategy elements
continued from prior periods.
► AsAs-needed reactions to unanticipated
developments and fresh market conditions—
conditions—this
part of strategy is developed on the fly .
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STRATEGY
Chapter 1
Core Concepts and Analytical Approaches
Figure 1.2
PowerPoint Slides
A Company’s Strategy Is a Blend of Proactive Initiatives
and Reactive Adjustments
Core Concept
A strategy cannot be considered ethical
just because it involves actions that are
legal. To meet the standard of being ethical,
a strategy must entail actions that can pass
moral scrutiny in the sense of not being
shady, unconscionable, or injurious to
others.
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Strategy and What is Legal
versus What Is Ethical
Strategy, Ethics, and
the Test of Moral Scrutiny
Just because a strategic actions is legal does not
necessarily make it ethical or morally acceptable.
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The standards of what constitutes legal behavior are
different from the standards of what is ethical and what
is not.
Ethical standards are about “right” vs. “wrong”
and a company’s duty to conduct itself honorably
and in a manner that reflects credit upon the
actions and decisions of company personnel.
What company behaviors can you identify that may be
legal but not ethical or morally acceptable?
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A strategy is ethical only if it can pass the
test of moral scrutiny:
scrutiny:
Requirement 1: The strategy cannot entail actions
and behaviors that cross the line from “should do” to
“should not do” (because such actions are unsavory,
shady, unconscionable, injurious to others, or harmful
to the environment)
► Requirement 2: The strategy must allow management
to fulfill its ethical duties in a manner that takes into
account the legitimate interests of all stakeholders.
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A Company’s
Business Model
Deals with a
company’s
competitive
initiatives
and business
approaches
Concerns whether
the revenues and
costs flowing from
the strategy
demonstrate the
business can be
profitable and viable
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The Relationship Between a Firm’s
Strategy And Its Business Model
A Company’s
Strategy
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Core Concept
A firm’s business model is a blueprint for
how its strategy and operating approaches
will create value for customers while at the
same time generating ample revenues to
cover costs and realize a profit
profit..
Absent the ability to earn good profits
profits,, a
firm’s strategy and operating blueprint are
flawed,, its business model is not viable
flawed
viable,,
and its ability to survive is questionable.
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STRATEGY
Chapter 1
Core Concepts and Analytical Approaches
PowerPoint Slides
The Two Crucial Elements of
a Company’s Business Model
The Business Model of Network TV
and Radio Broadcasters
Its Customer Value Proposition
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The Customer Value Proposition
How it will go about satisfying customer needs and requirements
at a price customers will consider to be a good value.
► Provide
audiences with free and appealing
programming content.
The greater the value delivered to customers and the lower the
price, the more attractive the value proposition is to customers.
The Profit Proposition
Its Profit Proposition (or “Profit Formula”)
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► Charge
advertising fees based on audience
size that more than cover the full costs of
providing the program content.
How it will go about creating and delivering customer value in a
cost--efficient manner at a price that produces enough revenues
cost
to cover costs and enable attractive profits.
The lower a company’s costs are in relation to the revenues
generated, the more appealing is its profit proposition
or “profit formula.”
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The Business Model of
Newspapers and Magazines
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Gillette’s Business Model in Razor Blades
The Customer Value Proposition
The Customer Value Proposition
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► Delivering
valuable or interesting information
and entertainment to readers.
The Profit Proposition
The Profit Proposition
sufficient revenues from advertising
fees and subscriptions to more than cover the
costs of producing and delivering their
products to readers.
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To sell a “master product”—
product”—the razor—
razor—at an attractively low price
and then make money on repeat purchases of inexpensivelyinexpensivelyproduced razor blades priced to yield high profit margins.
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Printer manufacturers like HewlettHewlett-Packard, Lexmark, and Epson
pursue much the same business model as Gillette—
Gillette—selling
printers at a low (virtually breakeven) price and making large
profit margins on the repeat purchases of printer supplies,
especially ink cartridges.
► Securing
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Why Does a Company’s
Business Model Matter?
Matter?
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The Three Tests of a Winning Strategy
The strategy that company managers craft for competing successfully
and running various parts of the business may or may not lead to
profitability..
profitability
Thus the role of a company’s business model is to provide
convincing rationale for why the resources and business processes
needed to execute the strategy will generate revenues sufficient to
cover costs and produce attractive profits and return on
investment..
investment
► Companies that have been in business for a while and are making
acceptable profits have a “proven” business model—
model—because there
is hard revenuerevenue-cost
cost--profit evidence that their strategies and
approaches to operating are capable of profitability.
► Companies that are in a startstart-up mode or that are losing money
have “questionable” or unproven business models.
Copyright © 2012 by Glo-Bus Software, Inc.
To provide a close comfortable shave using a razor (a oneone-time
purchase) and razor blades (purchased repeatedly).
repeatedly).
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Goodness
of Fit Test
How well does the
strategy fit the
company’s situation?
The Competitive
Advantage Test
Is the strategy
resulting in better
company
performance?
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Winning
Strategy
The Performance
Test
Is the strategy
resulting in better
company
performance?
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STRATEGY
Chapter 1
Core Concepts and Analytical Approaches
PowerPoint Slides
Two Reasons Why Crafting and Executing
Strategy Are Core Management Tasks
What Makes a Strategy a Winner?
Three questions can be used to test the
merits of one strategy versus another
and to distinguish a winning strategy
from a flawed or soso-so strategy:
1. There’s a compelling need for managers to proactively
1. How well does the strategy fit the firm’s
2. Nothing affects a company’s ultimate success or failure
shape how a firm’s business will be conducted.
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more fundamentally than how well its management team
situation?
2. Is the strategy helping the firm achieve a
sustainable competitive advantage?
3. Is the strategy resulting in better firm
performance?
performance
?
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A clear and reasoned strategy is management’s prescription for
doing business, its road map to competitive advantage, and its
game plan for pleasing customers and improving financial
performance.
Charts the company’s direction.
Develops competitively effective strategic moves and business
approaches.
Pursues what needs to be done internally to produce good daydayin/day
in/day--out strategy execution and operating excellence.
excellence.
Good Strategy + Good Strategy Execution
= Good Management
Core Concept
How well a company performs and the
degree of market success it achieves are
directly attributable to the caliber of its
strategy and the proficiency with which the
strategy is executed.
executed.
The better conceived a company’s strategy and the
more competently it is executed, the more likely that the
company will be a standout performer both financially
and in the marketplace.
A company that lacks clearclear-cut direction, has vague or
undemanding performance targets, has a muddled or
flawed strategy, or can’t seem to execute its strategy
competently is a company whose financial performance
is probably suffering, whose business is at longlong-term
risk, and whose management is sorely lacking.
Excellent execution of an excellent strategy
is the best test of managerial excellence.
excellence.
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The Road Ahead (cont’d)
Every business student and every aspiring manger
needs to know the answer to the following question:
In the coming chapters, we will explore what good
strategic thinking entails, describe the core concepts and
tools of strategic analysis, and examine the ins and outs of
crafting and executing strategy.
strategy.
What must managers do, and do well, to give a company its best
shot for being attractively profitable and successful in the
marketplace?
Then, in the accompanying strategy simulation exercise
where you will run a company in head
head--toto-head competition
with companies run by your classmates, you will have a
golden learnlearn-byby-doing opportunity to
The answer that emerges time and again and that
becomes the biggest lesson of the course you are taking
is that doing a good job of managing requires good
strategic thinking, good strategystrategy-making, and good
strategy execution.
execution.
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Welcome and best wishes for your success!
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The Road Ahead
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Apply what you have read about in the chapters
Gain some firsthand experience in actually crafting and
executing a strategy for your company and being held
accountable for how well your company performs.
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STRATEGY
Chapter 1
Core Concepts and Analytical Approaches
PowerPoint Slides
What You Can Expect to Learn
“Commerce is a game of skill which many
people play, but which few play well.”
well.”
Lesson 1:
1: FirstFirst-rate capabilities in crafting
and executing strategy are basic to
managing successfully and are skills every
manager needs to possess.
Ralph Waldo Emerson, poet and essayist
If the chapters, the experience of running your firm, and
the other coursecourse-related assignments help you become
a savvy player and better equip you to succeed in
business, then the time and energy you spend in this
course will indeed prove worthwhile.
Lesson 2:
2: Company managers don’t
deserve any applause for coming up with
a hoho-hum strategy that results in ho
ho--hum
(or worse) financial performance and a hohohum (or worse) industry standing.
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